Aussie

It appears that when it comes to mocking consensus groupthink emanating from lazy career 'financiers' who seek protection from their lack of imagination and original thought, 'creation' of negative alpha and general underperformance (not to mention reliance on rating agencies, only to jump at the first opportunity to demonize the clueless raters), in the sheer herds of other D-grade asset "managers" (for much more read Jeremy Grantham explaining this and much more here), David Rosenberg enjoys even more linguistic flexibility than even us. Case in point, his just released trashing of the latest Barron's permabull groupthink effort titled "Outlook: Mostly Sunny." And just as it so often happens, no sooner did those words hit the cover of that particular rag, that it started raining, generously providing material for the latest "Roasting with Rosie."

When thinking of Australia, one traditionally imagines a country that is nothing but a secondary derivative of China's trade surplus, and an unpegged currency that allows for more trading flexibility than the Yuan. As a result, recurring calls warning of a housing weakness in the country are often ignored as there always appears enough liquidity to mask the issue just long enough. That may all soon be changing. Earlier today, insurance company Genworth Financial pulled the IPO of its Australian unit, sending its shares plunging by over 20% and its default risk soaring. Unfortunately for GNW, and soon for the entire Australian financial sector, instead of merely blaming market conditions, in the IPO, which was supposed to take public up to 40% of the company's Australian mortgage business, and has instead been delayed to 2013, GNW laid out a far more nuanced, and detailed explanation of what is happening. Alas, it also may be the canary in the coalmine that has been so long overdue in yet another regional, bubblelicious housing market.

Here’s something you don’t see every day: Banks in Vietnam will actually pay YOU to store your gold in one of their safe deposit boxes. I was pretty surprised to find this out for myself; neither Simon nor I have seen it anywhere else in the world except here. This is actually how banking used to be. The original bankers were goldsmiths– big burly guys who worked with gold on a daily basis. They had the security systems already established, and, for a fee, they were willing to let you park your gold in their safes. Eventually, goldsmiths got into the moneylending business; instead of charging a security fee, they would pay depositors a rate of interest for the right to loan out the gold at a higher rate of interest. Goldsmiths’ reputations lived and died based on the quality of their loan portfolios, and their consistency of paying back depositor savings. Today that’s all but a footnote in history. Except in Vietnam.

So far futures are broadly unchanged, following the release of a Chinese trade report which while showing a resumption in the trade surplus, on expectations of further trade deficit in March, showed it was primarily due to a slide in imports, not so much a rise up in exports, a fact which impacted the Aussie dollar subsequently. We already noted that in conjunction with the BOJ, this means that Asia's central banks will likely hold off on further easing, and defer to the Chairman, especially with food inflation in China still prevalent. Aside from that the traditional European weakness is back, where April Sentic Investors Confidence slid to -14.7 on expectations of -9.1: to be expected from a meaningless market-coincident indicator. Keep a close eye on PIIGS bonds where whack a mole is now firmly back as the LTRO benefit is long forgotten, 3 month half life and all that.

Oh where to begin. The weakness in the markets started late last night when Australia posted a surprising second consecutive deficit of $480MM on expectations of a $1.1 billion surplus (with the previous deficit revised even higher). This is obviously quite troubling because as we pointed out 3 weeks ago when recounting the biggest Chinese trade deficit since 1989 we asked readers to "observe the following sequence of very recent headlines: "Japan trade deficit hits record", "Australia Records First Trade Deficit in 11 Months on 8% Plunge in Exports", "Brazil Posts First Monthly Trade Deficit in 12 Months " then of course this: "[US] Trade deficit hits 3-year record imbalance", and finally, as of late last night, we get the following stunning headline: "China Has Biggest Trade Shortfall Since 1989 on Europe Turmoil." So who is exporting? Nobody knows, but everyone knows why the Aussie dollar plunged on the headline. The shock sent reverberations across Asian markets, which then spilled over into Europe. Things in Europe went from bad to worse, after Germany reported its February factory orders rose a modest 0.3% on expectations of a solid 1.5% rebound from the -1.8% drop in January. But the straw on the camel's back was Spain trying to raise €3.5 billion in bonds outside of the LTRO's maturity, where the results confirmed that it will be a long, hard summer for the Iberian country, which not only raised far less, or €2.6 billion, but the internals were quite atrocious, blowing up the entire Spanish bond curve, and sending Spanish CDS to the widest in over half a year.

All you need to read.

An explicit contagion path chart, since you probably won't get info like this anywhere else... 

Members of the RIAA, Department of Homeland Security, Sony, Universal and Fox may have illegally downloaded files from BitTorrent ... And Lamar Smith – the Congressman sponsoring SOPA – used a pirated photograph on his official campaign website ...

The vast majority of professional investors are unable to contemplate truly dark times for the markets. After all, the two worst items most of them have witnessed (the Tech Bust and 2008) were both remedied within about 18 months and were followed by massive market rallies.Because of this, the idea that the financial system might fail or that we might see any number of major catastrophes (Germany leaving the EU, a US debt default, hyperinflation, etc.) is on par with Bigfoot or Unicorns for 99% of those whose jobs are to manage investors' money or advise investors on how to allocate their capital. 

All you need to read.

It is a pure coincidence that following the previous report of stern condemnation of traditional ECB QE in the form of Large Scale Asset Purchases (LSAP) by the Bundesbank, we should follow it up with the latest analysis by Chris Wood of CLSA's famous Greed and Loathing newsletter, in which the noted skeptic does an about face on his existing short European financial trade and covers such exposure, while observing the much-discussed major shift in ECB liquidity provisioning as the catalyst. And while his trade reco may or may not be right (if we were betting people we would put our money on the latter), what is interesting is the basis for the material change in exposure which to Wood is explained simply by the dramatic shift in the ECB approach toward monetary generosity, courtesy of the arrival of ex-Goldmanite Mario Draghi. The basis is the first noted here massive surge in the European balance sheet (Figure 2) which while not engaging in prima facie monetization, has done so via indirect channels, in the form of an LTRO, which is basically a 1%, 3-year loan, but more importantly, a balance sheet expansion which while having failed to increase the velocity of money in any way (with all of the LTRO and then some now having been redeposited back at the ECB as reporter earlier), has at least fooled the market for the time being that any sub 3 Year debt is "safe". So just how large will the next LTRO be? "Market talk is focusing on an even bigger amount to be borrowed at the next 3-year longer-term refinancing operation (LTRO) due on 29 February. GREED & fear has heard guesstimates of up to €1tn!" That's right - it is possible that in its quanto monetary diarrhea (but at least it's not printing, so the Bundesbank will be delighted), the ECB is about to increase its balance sheet from €2.7 trillion to € €3.7 trillion, or a €1.7 trillion ($2.2 trillion) expansion in 8 months! And gold is where again?

All you need to read.

This week's trifecta of key financial developments, that go far deeper than superficial headlines, namely China, Morgan Stanley (and European bank exposure in general) and the equity-credit disconnect, just got another major push. CNBC just interviewed Tim Backshall (of Capital Context) to discuss the dramatic moves in MS credit risk (which we mentioned earlier) and in an undeniably convincing accent (British, Aussie, South African?), he managed to bring many of our broader concerns into focus including global financial contagion, bank funding, Chinese growth, and high yield credit. We also learned that ZeroHedge is a blog.

We’ll share a couple of new pieces of information we’ve come across since our Aussie Pride post just a few days ago. To begin, we think it’s worth noting that the peak in existing house sales in the U.S., led the peak in price by about six months. It is intuitive that, Activity Leads Price in the real estate market. With that little nugget in mind, homeowners in Australia may wish to note the following press releases from HIA’s Economics Group.

The entire world is preparing to bury the dollar in advance of tomorrow's QE2 currency suicide by the chairman. Exhibit A: the OZ dollar which is now trading north of parity for the first time in 28 years, as Australia decidedly puts its in chips in China's basket, believing that no matter how high the OZ, China will have no problem with importing its exports. A quick look at the FX heatmaps shows that while the dollar is getting shorted across the board and the EUR is surging, and making Merkel livid once again, the Yen, at least so far, is benefiting as it has again become the short currency of choice against the AUD, in the one pair that correlation traders use to determine broad market risk more than anything. Yet with a near record number of dollar shorts in existence, will the be the proverbial cover on the news day? Or, if Bill Gross is right, are we going to see a 20% plunge in the dollar beginning tomorrow? Of course, if Gross is right, he would be buying stocks on margin, not MBS. So take notice.